Canada’s Credit Divide

Posted by
David Carruthers
on
October 30, 2025

Sector strains and regional gaps deepen amid tariff pressures.

Canada’s economy is losing momentum, expanding just 1.2% this year with a quarterly contraction confirming weak growth. Unemployment sits at 7%, the second highest in the G7, while inflation remains below 2%, suggesting subdued domestic demand. Despite this, Canada’s fiscal position is the strongest in the G7 and the current account deficit is modest at 2% of GDP, giving policymakers room for rate cuts or fiscal expansion over the next year.

Credit Benchmark consensus data show that credit risk is trending higher, reflecting pressure across corporates despite relatively stable bond spreads. As in other G7 markets, Canadian corporate spreads over government bonds remain tight, indicating that market pricing has yet to fully reflect the broad-based rise in underlying default risk captured by consensus credit data.

Executive Summary

Corporate default risk rose 9% over the past year, underperforming Canadian Financials but faring better than Europe and the US.
All major industries show recent deterioration, led by Basic Materials and Consumer Goods; Technology has weakened sharply.
Regional risk is highest in Quebec and British Columbia for Corporates, and in Alberta and New Brunswick for Financials. Over five years, British Columbia and Ontario have worsened, while Newfoundland has improved.
High Yield (HY) Corporates are up 11% in 18 months (vs. 4% for Investment Grade), slightly above the global trend.
Within HY, Basic Materials risk is up 18%, Industrials 11%, and Consumer Goods 15% — 1.5x faster than Consumer Services.
“bbb” downgrades outnumber upgrades by 3:1 over the past year.
US tariffs have elevated risks in Trucking, Retail, Auto, Food, Farming, Metals, and Engineering, concentrated in British Columbia, Ontario, Saskatchewan, and New Brunswick.
Credit cycles remain synchronized across provinces; while still downgrade-biased, recent trends indicate a gradual move toward stabilization.

Macro Background and Broad Trends

Corporates Credit Trend: Canada vs. Asia vs. Europe vs. US

With tariff headwinds and tight fiscal and monetary policies, Canadian Corporate default risk has deteriorated 9% over the past year – similar to Asia, but better than Europe and especially the US.

Canada Credit Trend: Corporates vs. Financials vs. Real Estate Investment & Services

Since early 2025, Corporates have slightly underperformed Real Estate and Financials.

Canada Industries: PD Change %

In the past 6 months, all major industries show some deterioration. Basic Materials and Consumer Goods deteriorated most, initially joined by Health Care although it has sharply improved recently. Consumer Services shows no sign of stabilizing, while Technology has been very volatile and recently deteriorated. Industrials and Oil & Gas are also improving, after modest deterioration. Utilities are stable.

Province-Level Risk

Canada Province-Level PD Risk: Corporates vs. Financials

In most Canadian provinces, average default risk is above the non-investment grade threshold of 48 Bps. Quebec, British Columbia and Ontario are highest, with Nova Scotia and Saskatchewan close to investment grade. Manitoba, New Brunswick, Prince Edward Island and Newfoundland are all investment grade but the borrower universe across these regions is small, so the monthly average may fluctuate.

G7 Financials risk is usually below Corporates, but Canada is the exception and only Manitoba follows the G7 pattern. Financial risks are especially high in Nova Scotia, Alberta and New Brunswick. Overall, Financials in Western Canada are higher risk than in the East (see Appendix for East-West Province split), but average Corporate risk levels are similar.

5-Year Change in Default Risk by Province

Longer term regional trends show a modest improvement in Quebec but deterioration in British Columbia and Ontario. Overall, Western Canada has improved, but Eastern Canada is slightly higher. Apart from New Brunswick, the smaller provinces have improved, especially Newfoundland and Labrador.

Industry-Level Risk

Corporates: Investment Grade vs. High Yield

For High Yield Canadian Corporates, default risks are up 11% in 18 months – slightly above the Global Corporate trend. Investment Grade Canadian Corporates also increased, but only by 4%.

Basic Materials & Industrials: Investment Grade vs. High Yield

Over the same period, High Yield Basic Materials show an 18% increase in default risk and High Yield Industrials are up 11%. Investment Grade Industrials and Basic Materials are both up 5%.

Consumer Goods & Consumer Services: Investment Grade vs. High Yield

High Yield Consumer Goods have increased 15% in 18 months, 1.5x faster than High Yield Consumer Services. Investment Grade Consumer Services have trended up by 5% and Consumer Goods have just spiked by the same amount.

Credit Migrations

Canadian Corporates: Credit Transition Matrix

Canadian Financials: Credit Transition Matrix

The above matrices show recent credit migration rates for Canadian Corporates and Financials.

For both categories, Investment Grade borrowers are biased to downgrades; High Yield biased to upgrades.

Corporates have a significant downgrade bias. In the large “bbb” category, credit downgrades outnumber credit upgrades by nearly 3:1 in the past 12 months.

Credit Migrations

Canada Industries Top 25 PD Changes: Past Year

Default risk changes by sector and geography show a clear impact due to US tariffs.

Ontario Iron & Steel and Trucking are highest, followed by New Brunswick General Retail, British Columbia Industrial Machinery and Saskatchewan Food and Farming sectors.

Iron & Steel, Autos, Trucking, Forestry/Farming, Industrials & Machinery/Engineering, plus Basic Materials including Chemicals are recurring sectors across Western & Eastern Canada, especially British Columbia, Ontario, Saskatchewan and New Brunswick.

Quebec does not appear in the Top 25.

Credit Correlations

Correlations between sectors over the past year show some clear blocks – for example, Basic Materials, Building, and Construction. These sectors, plus Oil & Gas and Transport are more highly correlated with High Yield Canadian Corporates.

Canadian Bank credit shows low correlations with default risks in most sectors, but moderate correlations with Global Corporates.

Technology shows low correlations, except with Media and Utilities. This may be a side effect of generally low credit volatility in these sectors over the 12-month period.

Correlations Between Monthly PD Changes: Canadian Industries vs. Global Corporates

Credit Cycles

Net Downgrades, Main Canada Provinces: Corporates & Financials

Monthly net downgrades show clear credit cycles for the main provinces. The cycles are broadly synchronized.

However, Western Canada overall (and Quebec in the East) are more volatile in the Covid and Covid recovery phases.

British Columbia and Ontario show higher volatility in the current cycle.

While the most recent cycle shows a bias to net downgrades for most months and provinces, it seems to be gradually trending lower – implying that there could be shift towards net upgrades over the next 12 months.

Conclusion

Canadian credit risk remains elevated but shows early signs of moderation. Persistent weakness in key sectors and provinces underscores the importance of granular credit monitoring. Forward-looking consensus data indicate where stress is most concentrated, and where normalization may begin if policy conditions ease.

Credit Benchmark’s consensus data provides independent, forward-looking measures of credit risk across sectors and regions. Use this data to identify early shifts in default trends, monitor regional divergence, and benchmark exposure to evolving credit conditions.

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